Managing The

Finance Function
Chapter 12
 Short-Term Sources of Funds
 Repayment schedules of less than one year
 Collaterals are sometimes required by short-term creditors
 Advantages of Short-Term Credits:
1. They are easier to obtain. Creditors maintain the view that
the risk involved in short-term lending is also short-term.
2. Short-term financing is often less costly, since short-term
financing is favored by creditors.
3. Short-term financing offer flexibility to the borrower.
After the borrower has settled his short-term debt, he may
consider other means of financing.
 Short-Term Sources of Funds
 Disadvantages of Short-Term Credits:
1. Short-term credits mature more frequently. This may
place the engineering firm in a tight position more often
than necessary.
2. Short-term debts may, at times, be more costly than long-
term debts.
 Supplies of Short-Term Funds:
1. Trade creditors 4. Finance companies
2. Commercial banks 5. Factors, and
3. Commercial paper houses 6. Insurance companies
 Short-Term Sources of Funds
1. Trade creditors – suppliers extending credit to a buyer for
use in manufacturing, processing, or reselling goods for profit.
Instruments used in trade credit:
1. Open-book credit – unsecured and permits the
customer to pay for goods delivered to him in a
specified number of days.
2. Trade acceptance – time draft drawn by a seller
upon a purchase payable to the seller as payee, and
accepted by the purchaser as evidence that the
goods shipped are satisfactory and that the price is
due and payable.
Short-Term Sources of Funds
3. Promissory Notes – unconditional promise in
writing made by one person to another, signed by
the maker, engaging to pay, on demand or at a
fixed or determinable future time, a certain sum of
money to, or to the order of, a specified person or
to bearer.
 Short-Term Sources of Funds
2. Commercial banks – institutions which individuals or firms
may tap as source of short-term financing. Two types of short-
term loans:
1. those which require collateral
2. those which do not require collateral
3. Commercial paper houses – help business firms in borowing
funds from the money market.